About 'how to calculate equity'|Customer equity to drive your marketing ROI
If you are considering investing in the stock of a retail company, here are 8 steps you can take to help you analyze its business. 1. Visit the retailer's stores. Visit at least one of the company's stores and, if possible, visit several, since the performance of a single store will reflect not just the policies of the parent company but also the performance of the store manager. Even a great retailer may have some poor store managers and, as a result, evaluating the company on the basis on one store can be misleading. Also, visit stores at different times of the day and the month. While you are there evaluate the look of the store and whether its fixtures, décor, ambiance and overall look are appropriate for its retail strategy. Also consider the store's housekeeping and organization, inventory and in-stock levels, pricing, in-store marketing (including signage and merchandise display), customer service, and check-out process, among other things. Try to experience the store as a customer would by asking store employees for help finding an item or for information about a product and, if possible, buy something for real-life experience with the speed, efficiency and friendliness of the check-out process. Check out is especially important since it creates the final impression with which a customer will leave the store. 2. Compare the retailer with it competition by visiting and evaluating competing stores. 3. Ask friends and family for their opinions about the retailer and about their experiences, both good and bad, in its stores. 4. Study the retailer's sales trends. Among other things, evaluate its year-over-year changes in same-store sales. Rightly or wrongly, the year-over-year change in same-store sales is the single number that investors most often focus on in evaluating retailers. As a result, a better-than-expected or worse-than-expected number often will move a retail company's share price near term. Same-store sales numbers include sales for stores that were open in both reporting periods being compared. As a result, they are not inflated by incremental sales from new stores that opened in the interim period. Generally, same-store sales are not reported for a calendar month but for a retail month consisting of either four or five weeks. Many retailers, including many discounters, apparel retailers and department stores, report same-store sales monthly, while some only report them quarterly. Even if the retailer you are evaluating reports same-store sales monthly, using a figure for a longer period such as a quarter can be more indicative of sustainable trends, since monthly sales may be affected by short-term factors such as weather and changes in holiday schedules (for example, Easter is in March some years and April others). Another useful sales figure for retailers is sales per square foot, which should be evaluated relative to the retailer's historical levels and relative to sales per square foot for competitive retailers. 5. Don't overlook inventory. Rising inventory levels can be a precursor to markdowns and, therefore, to margin erosion, so keep an eye on this number quarterly and pay attention to any comments that management makes about inventory levels. Compare current inventory per square foot to historical figures and relative to competitors' inventory levels. Also, look at inventory to sales relative to where it has been historically. If this number begins to rise, it could signal an inventory problem, because sales are deteriorating relative to plan, inventory levels are climbing or both. A quarterly inventory number that is out of line historically is worth further analysis. It could reflect a temporary blip. For example, inventory could have been accumulated for new stores that have not yet opened and, therefore, are not contributing to sales. On the other hand, it could be an early warning signal of problems ahead. 6. Analyze the retailer's margins relative to historical levels, including its gross income, operating income and net income as a percent of sales. Look carefully at whether margins are expanding or contracting, which can provide hints about price trends, product sell-through at full price or at a discount, product mix and sourcing. 7. Review the company's financial position, including cash on hand, debt levels and working capital, and calculate its return on equity (annual net income divided by shareholders equity). Also, take into account the retailer's lease commitments. Many retailers lease their stores rather than owning them, which means that they avoid taking on debt or using cash that otherwise would be needed to acquire real estate. On the other hand, their lease agreements may commit them to make payments for many years. These lease payment take the place of interest that would be booked (or interest income that would be foregone) if the store was purchased. Information on leases is reported in the retailer's 10-K and should be taken into account when considering the retailer's financial position. 8. Finally, compare the retailer's financials to those of other companies in the same retail sector, because many of the relevant figures such as margins and sales per square foot will vary widely from one sector to another. For example, a net margin that is adequate in the supermarket sector, which is characterized by high sales volumes and low margins would be disappointing for a specialty apparel retailer, and sales per square foot should be far higher at a jewelry retailer than in a discount store. These steps can help you to identify retailers that you may want to evaluate further on the basis of your preferred valuation measures (such as price to earnings per share (P/E), market capitalization to revenue, price to book value per share and so on). |
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